Just watched a great documentary called Boom Bust Boom, and it’s made me want to write about what I learned from it in order to boost my chances of retaining it.

Here;s the trailer :

The first thing I want to get down is Minsky^[1]. Hyman Minsky was an economist – a real economist. He came up with the Financial Stability Hypothesis, which states that capitalist economies are inherently unstable due to the fact that during prosperous times, a speculative euphoria (what Alan Greenspan called “irrational exuberance”) takes hold in people, and they get whipped into a speculative frenzy where the financial side of the economy becomes bloated with cash and starts dismantling those pesky regulations (which are totally STUPID and only in place because the GOVERNMENT HATES MONEY) that limit the amount of risk they can take and the kind of people who they can con into taking on that risk themselves.

Every financial crisis, from the Great Depression, has been preceded by a vigorous call for deregulation (because without it, I would be making MORE MONEY and that’s all I can see) and a steep drop in what is known as the “cost of risk index”. Risk becomes too cheap, the price of whatever is the center of the frenzy gets pumped up in a completely artificial way, and eventually it all crashes.

The thing is, like all Ponzi schemes, they really work for a while. People put their money in and get more money out. It really seems, at least to people blinded by greed, that they have found the secret to unlimited wealth and they will violently shout down anyone like Minsky who dares to say that bubbles burst and that the whole thing is bound for disaster.

Then the bubble bursts, enormous financial devastation occurs, and all the traditional economists sit there blinking in shock like cartoon characters when a stick of dynamite goes off in their hand wondering what the hell happened and declaring that the entire thing was completely unpredictable and, you know, stuff happens.

That’s because of another thing that I learned from the movie : Economics is even stupider than I thought it was. All mainstream economists – that is, those who would rather achieve academic success than actually get things right – use as the basis of their theories an economic model that, get this, assumes people are all rational agents and do the rational thing all the time.

That is so gobsmackingly stupid that it buggers the mind to even try to imagine how this ever seemed like a good idea. I am pretty sure that a poll of the entire human race would reveal that 99.9 percent of humans agree with the statement “people are stupid sometimes”.

And yet world economies are being run by people who think it acceptable to completely ignore this fact in order to make their theories more elegant. Economics, I assume, is a field that attracts the sort of person who consider human behaviour to be unpredictable and feels that, therefore, they don’t have to take it into account. They can just live in their happy world of numbers where everything is rational, predictable, and does what it is told, and the thing is, these marching morons have convinced nearly the entire world that they are right.

We might as well be trying to run economies using numerology, for fuck’s sake. That’s all traditional economics is, in the end – a belief that all questions can be answered through crunching numbers.

Well you can crunch all the numbers you want (we’ll make more) but if your fundamental assumptions are wrong, it’s not going to do you a damned bit of good. You might as well just be rolling your “lucky dice” or consulting the I Ching. There is no possible manipulation of numbers that will turn bad numbers into good ones. All you can do is to make the whole thing so complicated that it impresses people into thinking you must be right.

Oh, and another thing that is an unfailing predictor of imminent financial meltdown is debt. The more debt an economy generates, the less stable it gets. And when you think about it, this makes total sense, because debt is not money. Debt is potential money. Maybe that debt will be paid, and maybe not. But the problems arise when debt is treated as actual money, and passed around like it’s the real thing.

And then the bubble bursts, people wake up to the fact that they have been building castles in the air(and mortgaging their real homes to do it) , and most of that debt evaporates because suddenly, nobody has any money to pay their debts.

And poof, billions of dollars disappear from the economy because they were never real or sane in the first place. Like faerie magic, they disappeared when people stopped believing in them, and a whole lot of people end up trying to sell what they bought when the price was high and now have no choice to sell now that the price is low.

Buy high, sell low has never been a successful financial strategy.

The injustice of it all, though, is that billions of people who had absolutely no part in this farce end up suffering the effects anyway. You wake up one morning to find the news telling you everything’s fucked and all those people what invest in them stocks and things are in a panic, and you’re just a working class Canadian with a spouse and kids and a high school education trying to make ends meet, and even though you know nothing about that entire world, you know for sure that somehow, you’re gonna be the one who gets screwed.

And what happens to the people who actually perpetrated this heinous act of lunacy and greed?

Absolutely nothing. Of course. They suffer no penalty and they even still get to be rich.

And that’s what has people so pissed off.

Can you blame them?

I will talk to you nice people again tomorrow.